What is Making Tax Digital?
Making Tax Digital (MTD) is the biggest change to VAT in decades!
MTD is the government’s plan to digitalise the tax system, with every individual in the UK eventually having their own personal tax account and every business its own business tax account - meaning the end of the traditional annual tax return for millions.
Where we are now:
Currently, any VAT registered business has a responsibility to provide information to HMRC by completing a VAT return, whether that is monthly, quarterly or annually. This is processed by accessing the HMRC VAT gateway and entering the required information, either directly with HMRC or through an application programming interface (API) via accounting software providers such as Xero.
For those businesses that submit direct to HMRC, many are still using manual systems to record their accounting information and others are using spreadsheets such as Microsoft Excel and Google Sheets.
How will MTD change VAT returns?
MTD changes this for all VAT periods that commence after 1 April 2019 for all businesses with taxable turnover above £85,000. From April 2022, the programme will be extended to all VAT registered businesses with turnover below the VAT threshold, and from April 2023, it will apply to taxpayers who file income tax self-assessment tax returns for business or property income over £10,000 annually.
Once MTD is mandatory, businesses will be required to keep their accounting records in a digital manner. It was intended that spreadsheets would not be acceptable, but this has been relaxed as long as there is an API that can link them to HMRC. Whilst such software exists it is very much a short term workaround and will not provide a long term solution.
MTD Requirements of accounting software:
All businesses will need to review their accounting software to ensure that it will be compliant with the new regime. As a minimum, it will need to be able to:
- Process records in a digital form
- Preserve digital records in a digital form
- Create a VAT return from the digital records
- Provide HMRC with VAT data on a voluntary basis
- Receive information from HMRC via the API platform in order to allow HMRC to send ‘nudges’ to the firm or their tax agent
Digital record keeping requirements
HMRC has confirmed businesses do not need to keep digital invoices and receipts, however, they do need to keep the transaction data digitally.
The list below summarises what is required to be kept digitally:
- Your business name
- The address of your principal place of business
- Your VAT registration number
- A record of any VAT accounting schemes that you use
For each supply you make you must record:
- The time of supply
- The value of the supply
- The rate of VAT charged
For each supply you receive you must record:
- The time of supply
- The value of the supply including any VAT that is not claimable by you
- The amount of input tax that you will claim